Sunday, May 20, 2012

One fact ought to tell you all you need to know about the risks faced by homeowners signing leases for natural gas drilling on their property: Wells Fargo & Company, both the largest home mortgage lender in the United States and a major lender to the country's second largest producer of natural gas, Chesapeake Energy Corp., refuses to make home loans for properties encumbered with natural gas drilling leases.

This salient fact comes from an article (PDF) written for the New York State Bar Association Journal by attorney Elisabeth N. Radow. Written in the form of an even-tempered legal brief, Radow relates one astounding finding after another. Perhaps most relevant to homeowners who either have signed drilling leases or who may be asked to sign them in the future is this: "Signing a gas lease without lender consent is likely to constitute a mortgage default." You read that right. Default.

Her conclusion stems from something which most homeowners probably don't even realize: Standard residential mortgages prohibit:

the use, disposal, storage, or release of any hazardous substances on, under or about the mortgaged property. In mortgages, hazardous substances include gasoline, kerosene, other flammable or toxic petroleum products, volatile solvents, toxic pesticides and herbicides, materials containing asbestos or formaldehyde and radioactive materials.

Of course, homeowners often have and use some of the above-mentioned materials. But the lenders may invoke their rights should industrial-sized activities such as hydraulic fracturing or fracking occur. Fracking, a process often associated with natural gas drilling, utilizes a cocktail of hazardous chemicals mixed with water. Millions of gallons of the mixture are pumped under high pressure into each well to fracture deep shale formations and thereby release the embedded natural gas found there. Beyond this, homeowners with mortgages are prohibited from violating any environmental laws, federal, state or local. Can they always count on drillers to observe those laws?

Now, here's how the fracking mess intersects with the ongoing mortgage mess. Most mortgages are sold into the secondary market to federal lenders such as Fannie Mae and Freddie Mac, and some are packaged in groups as mortgaged-back securities and sold to investors. The mortgage lenders make representations to buyers in the secondary market that the mortgages they are selling conform to widely accepted standards that prohibit the kinds of activities listed above. In Radow's opinion it is likely that many residential mortgages with natural gas leases on the underlying properties have already made there way onto the books of Fannie Mae and Freddie Mac or into investor portfolios. And, with shale gas found across many states, there are likely to be many more compromised mortgages sold into the secondary market in the future.

But why not turn to one's insurance company to pay for damage to one's property? It turns out that homeowners insurance almost always excludes damage from industrial operations on one's residential property, Radow writes. And, that's what natural gas drilling is, an industrial operation. Even for those who escape the problems of water contamination and human and animal health effects, there remains the ever present possibility of damaging explosions and fires from drilling and production operations. Homeowners insurance won't pay for that either.

Surely, the drilling companies are responsible for explosions and fires linked to their operations. Unlike water contamination which is usually an underground phenomenon and often difficult to prove, it should be obvious that the companies are responsible for damage from explosions and fires caused by their actions. Don't count on it, Radow seems to say. In such circumstances, homeowners may have to sue for damages and even if they win, they may not get paid for all damages since the natural gas drillers admit in their regulatory filings that they may not carry enough insurance to pay for damage due to such mishaps.

Now, we come to who will ultimately pay for any cleanup on abandoned, underinsured properties contaminated and otherwise made uninhabitable or at least, undersirable. Perhaps you've already figured out that it will be in almost all cases U.S. taxpayers who now own the two largest mortgage companies in the country, Fannie Mae and Freddie Mac. When these mortgage giants finally take possession of all the contaminated and impaired properties, they will be obliged to clean them up and simultaneously bear the losses in the value of the mortgages issued on those properties.

In this way, the average citizen will be subsidizing the natural gas industry by bearing the costs associated with devalued property and hazardous waste cleanup. When all of this starts happening in a big way, you can count on those in charge saying that nobody saw it coming.

Kurt Cobb is the author of the peak-oil-themed thriller, Prelude, and a columnist for the Paris-based science news site Scitizen. His work has also been featured on Energy Bulletin, The Oil Drum, 321energy, Common Dreams, Le Monde Diplomatique, EV World, and many other sites. He maintains a blog called Resource Insights.

2 comments:

Lyle
said...

Nothing new here in Texas almost all sales are without mineral rights has been that way for a long time. Typically there will be a waiver of surface rights involved. In that case the drilling will be nearby but not on the property. Here is an article about mineral rights from EHow- http://www.ehow.com/facts_6402561_surface-rights-vs_-mineral-rights.htmlAs the article points out most sales where mineral rights have potential value do not include the mineral rights.

i'm afraid that this will lead to collusion - and possibly merger - between oil/gas companies and banks. two huge corporate interests at war? oh, they'll solve their problems with each other fast enough, unlike political entities. however, as with political entities, the losers will be the people - big time.